Nifty unlikely to see rally beyond 11,200

The 11,100-11,200 range is likely to be a resistance zone for the Nifty in the short term.

Highlights

The weak market breadth, reflected in the fact that mid-cap index is down over 20 per cent from its peak.

The Nifty is propped up on gains in select heavyweights, is not giving confidence to investors.

Moreover, there has been a series of negative news flow concerning corporate governance issues.

Mumbai: The Nifty crossed 11,000 for the first time in four months last week, but barely managed to stay above the level for two sessions. Money managers believe that a significant rally beyond 11,200 level is unlikely due to likely moderation in flows from domestic and overseas investors ahead of the general elections.

The weak market breadth, reflected in the fact that mid-cap index is down over 20 per cent from its peak and the Nifty is propped up on gains in select heavyweights, is not giving confidence to investors. Moreover, there has been a series of negative news flow concerning corporate governance issues and high pledged shares at some large corporates in recent months which has also hurt sentiment.

“The market has to overcome the worry of elections which is keeping gains under check. DII flows were supportive in the first-half of 2018 and that support has eased out,” said Nilesh Shah, managing director at Kotak Mahindra Asset Management Company.

The Nifty crossed the 11,000 mark and the Sensex topped 37,000 on Wednesday. The Nifty ended down 125.80 points, or 1.1 per cent, at10,943.60 on Friday, while the Sensex ended down 424.61 points or 1.1 per cent at 36,546.48. RBI announcing a rate cut and a change in policy stance to neutral from calibrated tightening failed to excite the market as they were priced in.

FPI inflows have picked up in recent days due to dovish commentary on rates by the US Federal Reserve but market experts said other markets are likely to benefit more from this as they are trading at cheaper valuations. FPIs have bought local shares worth Rs 3,300 crore in February after pulling out nearly Rs 500 crore in January. MF have bought stocks worth Rs 400 crore in February after buying shares worth Rs 6,800 crore in January.

“Other emerging markets are cheaper, so India has not really benefited from that,” said Andrew Holland, CEO, Avendus Capital-Alternate Strategies.

Holland said mid- and smallcap stocks have taken a beating and a small number of stocks are keeping the market high. “The global economy is looking worse. DII flows are starting to slow down. I don’t think there is any catalyst for the market to move higher,” said Holland.

Meanwhile, lump-sum investments into mutual funds slowed down in January even as collections through SIPs touched a record high.

Retail assets, which include equity funds, balanced funds and ELSS funds, saw inflows of Rs 5,206 crore, the slowest in the last 30 months since July 2016, when the industry garnered Rs 4,585 crore.

Lump-sum investments are seeing redemptions as the broader market has been weak for more than a year and trailing returns from some of the largest mutual fund schemes have delivered negative returns over the trailing 12 months, said CLSA.

The brokerage said domestic flows are now weakening and that’s likely to be the key driver for market de-rating going into the elections as political uncertainties mount.

“Running up to the elections, we believe the domestic flows would likely weaken further. Our recent interactions with Asia-based investors indicate that it’s becoming increasingly difficult to allocate more to India due to steep valuation difference,” said CLSA.

India’s benchmark trades at 16.8 times on a one-year forward basis while MSCI Emerging Markets index trades at 10.6 times.

The 11,100-11,200 range is likely to be a resistance zone for the Nifty in the short term.

“The market moved above its two months hurdle of 10,985 in the last week and headed towards 11,118 but failed to hold its breakout zones and witnessed profit booking from higher levels. The immediate trend is positive, but upside barriers are there because of call writing activities,” said Chandan Taparia, derivative analyst at Motilal Oswal. The highest open interest among Nifty call options is at 11,000 followed by 11,200.